Strategic Defaults Are A Contributor To Guideline Changes

By
Mortgage and Lending with George Souto NMLS #65149 FHA, CHFA, VA Mortgages NMLS #65149

I posted a blog yesterday "Strategic Defaults are a big part of the problem" giving my reasons why I feel that Strategic Defaults Are A Contributor To Guideline Changes, and that i would post another blog to point out some of the Guideline changes that have come about because of Foreclosures and Shortsales. I feel very strongly about this issue, because I see firsthand every day the impact that Foreclosures are have on the ability of others to purchase a home, that anything that voluntarily further contributes to that is inexcusable in my opinion.  Strategic Defaults are completely voluntary and a CHOICE to do so, and NOT out of NEED.  I started off yesterday's blog with my definition of what I understand a Strategic Default to be, so I will state it again:

Strategic Default: A foreclosure that results NOT from the Homeowners inability to make his/her mortgage payment, but as a result of the Homeowners CHOICE to not make the mortgage payment, because the property has decreased in value and presently is no longer worth what they paid for it.

Some have tried to justify this behavior by putting the blame on those who received TRAP money, and wrongfully kept it.  I agree that what these institutions did was wrong, but even if they had used the money like I believe they were supposed to, it would not have been used for those doing Strategic Defaults.  The money as I understand it, was intended to help homeowners that are in trouble with their mortgages, and had no other choice but to be Foreclosed on or do a Short Sale.  It was not intended for those who are voluntarily walking away from their properties.

In my opinion because of needless Strategic Defaults we have seen an even greater tightening of the Lending Guidelines than we would have otherwise.  There is no dispute that Foreclosures and Short Sales have caused Lending Guidelines to tighten and change.  It was a given that as banks experienced loses they would make adjustments to the Guidelines by which they would lend by.

The first changes that we saw were, the almost complete elimination of Stated Income type loans.  I say almost because I have been told that they can still be obtained.  I can't do them, and I don't know who can, but I am told they still exist.  Stated Income filled the need for the Self-Employed who make enough to purchase and afford a mortgage, but because of the way they report their income they have difficulty document it.  So now Self-Employed people are having a very hard time purchasing or refinancing a home since Stated Income Loan Programs have been virtually eliminated.

This was quickly followed by a reduction in the Debt-To Ratio Limits.  At one time I could do a Conventional Loan with a Total-Debt-To-Income of 67%.  Yes you heard that right, 67% of total Gross (not net) Income.  This obviously needed to change, and as Foreclosures and Short Sales increase, the reduction in the Total-Debt-To-Income Limits for Conventional Loans slowly decreased down to 45%.  It does not take a mathematician to figure out that reduction has taken a huge number of people out of the market.

Downpayment requirements have also tightened as Foreclosures and Short Sales have risen.  Programs like My Community and Flex 100 as well as other 100 financing programs have disappeared.  Again it does not take a genius to figure out the impact that this has had, especially on First Time Homebuyers.

FHA will on October 4th change their Guidelines once again.  The Annual Premium (MI) will change from a .55 multiplier to a .85 multiplier for loans with LTV's of less than 95% and .90 for loans with LTV's of over 95%.  This is going to have a HUGE impact on Borrowers qualifying for a loan, because it will significantly raise their Debt-To-Income Ratio's.  There are many that have been qualified that will no longer qualify come October 4th.

There are many other changes that have contributed to the decreased number of qualified Buyers, due to Guideline changes that have taken place because of Foreclosures and Short Sales.  So I hope you can see why I am so passionate about anything that VOLUNTARILY further increases and contributes to more and more Foreclosures.  As Foreclosures and Short Sales increase the more Guidelines changes there will be, and the less qualified Borrowers we will have.  There is nothing profound about that, it is a proven fact.

So to encourage or even justify a VOLUNTARY behavior that contributes to this is mind boggling to me.  And what is even more mind boggling is that the justification is being mostly done by those that sold these depreciating value houses to those doing the Strategic Defaults.

I am in the business of doing loans, Realtors in the business of selling houses, Appraisers are in the business of appraising houses at their current value.  None of us are in the business of predicting the future.  If we could tell what the future will bring, we would all be very rich.  Yet the Lending industry is suppose to take the loss because they lent money to people who QUALIFIED at the time (many of the foreclosures and short sales were not a result of subprime loans and loans done by shifty lenders).  Lenders lent money and qualified Borrowers based on the Guidelines of the time.  To sit back now and say well they should not have done that is almost laughable.  Since when did that stop Realtors from selling those so called over priced houses, Appraisers from appraising those house, and Loan Officers from doing the loans?

Everyone in this Industry is presently being affected by what is happening.  This is our lively hood.  Our Borrowers and Buyers are being affected by what is happening.  So I can't understand how anyone can defend or try to justify someone VOLUNTARILY participating in a behavior that will further take Borrowers and Buyers out of the market.

This blog is already way to long, so I will stop here.  But if you have taken the time to read all of it, and I apologies for its length, I can't see how you can come to any other conclusion besides that Strategic Defaults Are A Contributor To Guideline Changes and have affected the ability of Buyers to purchase or refinance a properties.

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 Info about the author:

George Souto NMLS# 65149 is a Loan Originator who is licensed in #CT, #RI, #MA, #NH, & #FL and can assist you with all your #FHA, #Conventional, #VA, #USDA, and #State Bonded Progam #mortgage needs in #CT, #RI, #MA, #NH, & #FL. George resides in Middlesex County which includes #Middletown, #Old Saybrook, #Middlefield, #Durham, #Cromwell, #Portland, #Higganum, #Haddam, #East Haddam, #Moodus, #Chester, #Deep River, and #Essex. George can be contacted at (860) 573-1308 or souto@snet.net

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Re-Blogged 2 times:

Re-Blogged By Re-Blogged At
  1. Adam R. Cohn 08/29/2010 08:45 AM
  2. Don Spera 09/01/2010 12:31 PM
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Rainmaker
1,317,651
Joan Whitebook
BHG The Masiello Group - Nashua, NH
Consumer Focused Real Estate Services

Hi George --- I'm back.. I was wondering how many of the foreclosures are due to a strategic default  -- is anyone tracking this?

Aug 31, 2010 03:43 PM #53
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George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
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Joan, I have not seen a figure seperating Stretegic Defaults from the other Foreclosure figures.  But it would be an interesting figure to see.

Sep 01, 2010 09:00 AM #54
Rainmaker
544,237
Eric Michael
Remerica Integrity, Realtors®, Northville, MI - Livonia, MI
Metro Detroit Real Estate Professional 734.564.1519

George, if a Strategic Default is just walking away, letting it go to foreclosure, while being able to pay but choosing not to, then I agree with you. I guess my thinking was a little different, but now that I'm using the same meanings as you (and the rest of the world), I'm on board with what you're saying. I still think that if this is what they've decided to do, they should Short Sale, and not just walk away, and I'll still help them with that.

Sep 01, 2010 11:53 AM #55
Rainer
147,902
Don Spera
CR Property Group, LLC - East York, PA
Serving York and Adams County, PA

Where is the hall monitor when you need one.  They are no different than scammers and should be held fully accountable and prosecuted to the full extent of the law.  They slip through the cracks and then we all have to pick up the tab.

Sep 01, 2010 12:32 PM #56
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George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

Eric, I agree, a Short Sale is a better option, and they will be in a better position to purchase latter. Fannie Mae has proposed not to let those that do Short Sales not be able to to by for seven years, This has not happened yet, but it most likely will, and if Fannie Mae does it the others will follow along.  Short Sales I believe is 3 years for FHA and 4 years for Fannie Mae.

 

 

Sep 01, 2010 03:00 PM #57
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George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

Don, and I thought that my position was tough :)

Strategic Defaults have to be discouraged, and it is mostly going to take tough penalties to do that.

Sep 01, 2010 03:00 PM #58
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1~Judi Barrett
Integrity Real Estate Services 118 SE AVE N, Idabel, OK 74745 - Idabel, OK
BS Ed, Integrity Real Estate Services -IDABEL OK

George, Just came back by to see what you've been up to.  Tis is a great post.

Sep 01, 2010 03:06 PM #59
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George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
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Judi thank you!

Sep 01, 2010 03:10 PM #60
Rainmaker
891,666
Gail Robinson
William Raveis Real Estate - Southport, CT
CRS, GRI, e-PRO Fairfield County, CT

George, Congratulations on the Feature!  This is an excellent topic for discussion because everyone has an opinion and very different perspectives.  You've done a great job moderating a high octane topic.

Sep 02, 2010 03:46 AM #61
Rainmaker
891,666
Gail Robinson
William Raveis Real Estate - Southport, CT
CRS, GRI, e-PRO Fairfield County, CT

George, Congratulations on the Feature!  This is an excellent topic for discussion because everyone has an opinion and very different perspectives.  You've done a great job moderating a high octane topic.

Sep 02, 2010 03:46 AM #62
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George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

Gail, I like the way you phrased that "high octane" ......... LOL

I have to remember that.  Thank you :)

Sep 02, 2010 09:14 AM #63
Rainmaker
54,568
D. Bass
Ask The Underwriter - Atlanta, GA
Blog: Ask The Underwriter

All I can say is WOW and AMEN!....I spent 10 months underwriting forecloses loans....and aside from it being THE most DEPRESSING underwriting job I have ever had, it was an eye opener on why the guidelines change every 15 minutes!!!!!  I can't say any more than that, but you are right on the MONEY!

Sep 03, 2010 12:10 PM #64
Rainmaker
930,956
Ann Hayden 636-399-7544
Berkshire Hathaway HomeServices Select Properties-St. Louis Missouri - Chesterfield, MO
SelectAnn.com

George,

These defaults are just wrong....

Ann Hayden in Wildwood, MO

Sep 03, 2010 01:38 PM #65
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George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

D. Bass it is good to have your input on this, because I know that you as an Underwriter have a different knowledge of what has brought us to this point, than the rest of us.

Ann, I totally agree.

Sep 04, 2010 06:23 AM #66
Rainmaker
1,049,108
Fred Carver Personal Real Estate Corporation
RE/MAX Camosun Victoria BC Real Estate - Victoria, BC
Accredited Real Estate Consultant

Hi George....Congratulations on your feature post and your 600,000 points for Blogging here in the Rain..that takes a lot of time and effort.

Cheers

Sep 10, 2010 05:54 PM #67
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George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
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Fred, thank you.  I have been around since September of 2006 so it has taken a while to get to this point.

Sep 11, 2010 10:37 AM #68
Rainmaker
290,878
Ken Patterson
TPR Properties - Rocklin, CA
Roseville Real Estate, TOP Rocklin Realtor

Hi George,

Bottom Line is no matter how you choose to define the transaction or determine the honesty of those involved, all parties have come to a settlement whether a short sale, strategic short sale or foreclosure.  All parties agreed and assumed risk in the begining.  All parties agreed and assumed loss in the end.  Certainly investors and lending institutions see value in whatever resolution they come to just as those having signed a note see value in their direction.  You and I see things quite differently, but ultimately the free market gets to decide the answer.  Good luck to you!

Sep 12, 2010 06:45 AM #69
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George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
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Ken, you are right about there being a bottom line, but that bottom line is that there is nothing honest about signing a Note stating that you promise to pay a debt and then just walk away from that obligation.  The end result of Strategic Defaults is that innocent people end up getting hurt, if you don't think so, that a look at my latest blog and see the Guideline changes that they have lead to.  And by the way there is no such thing as a Strategic Short Sale, but there are Strategic Defaults which are just simply another word for dishonesty.

Sep 12, 2010 11:33 AM #70
Rainmaker
325,871
Esko Kiuru
Bethesda, MD

George,

Strategic defaults certainly are affecting mortgage lenders' guidelines, no question. However, they also are part of the free market working its way out of this prolonged mess.

Sep 16, 2010 02:42 PM #71
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George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
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Esko, I hope your right, but I don't see that as part of what is know as the free market.  If it is, it is a strange new component.

Sep 16, 2010 04:45 PM #72
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